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IRS Issues Final Regulations on Commuting Expenses Deduction Disallowances

  • Written by Steel Rose

Yesterday, December 9, the IRS released final regulations implementing the Section 274(a)(4) and 274(l) deduction disallowances, adopted as part of the 2017 Tax Cuts and Jobs Act. Section 274(a)(4) disallows employer deductions for the cost of providing qualified transportation fringe (“QTF”) benefits provided to employees. Section 274(l) provides a broader deduction disallowance for expenses paid for, or to reimburse for, employees’ trips between their residences and their places of employment. Both deduction disallowances took effect for tax years beginning after December 31, 2017.

The final regulations largely follow the approach taken in the proposed regulations issued in June, which built on earlier guidance provided in Notice 2018-99. Treasury Regulation § 1.274-13 addresses the deduction disallowance under section 274(a)(4) for the cost of QTFs provided under section 132(f), such as qualified parking, transit passes, and other tax-free commuting benefits. Treasury Regulation § 1.274-14 addresses the deduction disallowance under section 274(a).

Although the approach of the final regulations is generally unchanged from the proposed regulations (discussed in detail in our earlier coverage), the IRS did make a few noteworthy changes in response to taxpayer comments, discussed below:

Parking with No Objective Value

The IRS rejected a commenter’s suggestion that parking with no objective value, such as parking in industrial, remote, or rural areas (i.e., areas where the general public would not pay to park) is not a QTF. The Preamble to the final regulations indicates that Treasury and the IRS do not believe the value of parking to an employee is relevant in determining whether the parking itself constitutes qualified parking. Although it seems somewhat illogical to consider value irrelevant to determining whether the value of a benefit is excluded from income, the IRS apparently believes that, even if the amount excluded from the employee’s income under Section 132(f) is zero, the provided parking is still “qualified” and therefore a QTF. Nonetheless, Treasury and the IRS determined that no deduction disallowance is necessary in such cases. In such event, the exception under Section 274(e)(8) applies because, if the value of the parking is zero and therefore the employee is not charged, the employee should be considered as having paid adequate and full consideration for the parking.

It remains to be seen how broadly this exception may be applied. Although the Preamble mentions rural areas, parking is generally provided without charge in exurban and even many suburban locales. Similarly, parking is generally provided in business parks in such areas without charge and the general public would not pay to park in such areas. The application of Section 274(e)(8) to parking provided in such areas would seem to significantly reduce the impact of the disallowance outside of large cities and downtown areas.

Parking at Multi-Tenant Buildings

In response to commenters’ requests, the final regulations clarify that “general public” includes employees, partners, 2-percent shareholders of S corporations, sole proprietors, independent contractors, clients, or customers of unrelated tenants in a multi-tenant building, as well as customers, clients, or visitors of the taxpayer, individuals delivering goods and services to the taxpayer, students of educational institutions, and patients of health care facilities. The clarification should help many employers in multi-tenant buildings avoid the deduction disallowance, because, under the regulations’ primary purpose test, the majority of the parking at the building will be available to the general public unless the employer occupies a large portion of the building.

Peak Demand Period

Several methodologies for determining the disallowance under Section 274(a)(4) require the employer to determine the total number of parking spaces used by employees during the peak demand period for employee parking on a typical day. In light of comments regarding the COVID-19 pandemic, the final regulations permit employers to determine the cost per space method using the peak demand period on a monthly basis to allow employers to account for fluctuations in the number of employees working at the worksite during the year. In addition, if a taxpayer owns or leases a parking facility in a federally declared disaster area, as defined in Section 165(i)(5), the employer may use a typical business day in the tax year prior to the year in which the taxpayer’s business was impacted by the disaster in measuring usage during the peak demand period. The rule applies to tax years ending after December 31, 2019.

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